[2011] UKFTT 209 (TC)

TC01074

Appeal number TC/2010/05597

Appeal against amendment made to tax return in relation to lump sum payment made in respect of missing pension contributions by the employer company –whether it fell to be exempted from tax- appeal dismissed- appeal against consequent penalty allowed

FIRST-TIER TRIBUNAL

TAX 

	DAVID TAYLOR	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

				TRIBUNAL: S.M.G.RADFORD
						G.HUNTER

Sitting in public at County Square, Ashford, Kent TN23 1YB on 8 February 2011

The Appellant in person

Ms H Leithes-Wilson for the Respondents

© CROWN COPYRIGHT 2011

DECISION

1.	This is an appeal against the amendment made to the Appellant’s tax return for the tax year ending 5 April 2004 which resulted in an extra £11,954 becoming chargeable on the Appellant in respect of tax and National Insurance.
2.	The Appellant also appealed against the penalty determination made on him on the grounds that he was negligent in the completion of his tax return for that year.
Background and facts
3.	In early 2004 the Appellant received a lump sum payment of £11,953.85 from his employers at that time, Barkland Limited. Under his contract of employment the company had agreed to make payments into his pension scheme for him but had not done so.
4.	At the time the company were going into liquidation and so offered him an ex gratia payment in respect of the missing pension contributions.
5.	The employment section of the Appellant’s tax return showed payments of £81,173 and tax deducted of £29,822. The Appellant entered the lump sum payment on his tax return under “Reliefs” in the belief that the payment would qualify for the £30,000 exemption as he viewed it as damages for breach of contract.
6.	The Appellant’s P60 showed pay of £93,127 and tax deducted of £29,822.60.
7.	HMRC opened an enquiry into the Appellant’s tax return on 11 April 2006.The enquiry officer came to the conclusion that the lump sum was taxable and that the Appellant’s tax return was incorrect as he had shown the lump sum to be exempt from tax. 
8.	On 13 December 2006 he closed the enquiry and he amended the return to show an increase in the tax payable of £4,782 tax which resulted in a repayment of £322.13 being due to the Appellant rather than the £5,103.73 claimed on the Appellant’s tax return and which had been paid to him on 4 August 2005.
9.	Although the Appellant was made redundant shortly after he received the payment he continued to work at the company after the payment was received and a payslip confirming this was produced to the Tribunal.
10.	The enquiry officer had made enquiries with a former director of the company and had been told that the payment was a performance related bonus. As a result he came to the conclusion that the Appellant had been negligent in completing his tax return and imposed the penalty.
11.	The penalty was calculated at 15% of the tax due – 10% for delay in responding to the enquiries and 5% because he had shown the bonus payment as a tax free payment.
12.	The Appellant produced documentation to the Tribunal however which confirmed his assertion that he had received no bonus for the year in question and that the payment was in lieu of the missing pension payments.
13.	The Appellant had been slow to answer the queries because he had been diagnosed with an aggressive form of cancer which required hospitalisation.
14.	On 23 January 2007 the enquiry officer wrote to the Appellant explaining that the extra £4,781 of tax due had incurred interest charges.
15.	The Appellant addressed a complaint to HMRC in respect of his treatment and received a reply which inter alia confirmed that the letter of 23 January was correct.
16.	By letter of 27 August 2009 HMRC confirmed that they now accepted that the payments had been made in lieu of pension contributions which the company had failed to pay into the Appellant’s pension scheme. They confirmed that had the payments been made directly to the pension scheme they would have been exempt from tax but that as they were made directly to the Appellant they were strictly chargeable to tax.
17.	On 15 March 2010 the enquiry officer confirmed the findings of his 27 August letter and reiterated that £4,781.60 of tax was now due.
18.	The Appellant replied stating that due to his illness he was now unemployed and living on incapacity benefits and had no money whatsoever. He therefore had no option but to ask for a review as he had no money to pay off the tax to get rid of the enquiry even if he thought it was correct, which he did not.
19.	The review concluded that the assessment and penalty determination were correct but again referred to the payment as a “possible bonus”.
Legislation
20.	Section 6 (1) of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”) states that tax is to be charged on general earnings and specific employment income.
21.	Section 62 (2) of ITEPA states that earnings in relation to an employment are any salary wages or fee; any gratuity or other profit or benefit of any kind obtained by the employee if it is money or moneys worth; or anything else that constitutes an emolument of the employment.
22.	Section 3 (3) of ITEPA states that moneys worth is something of direct monetary value to the employee or capable of being converted into money or something of direct monetary value to the employee.
23.	Section 95 of the Taxes Management Act 1970 (“TMA”) provides for the imposition of a penalty charge for the submission of an incorrect return resulting in a loss of tax.
24.	Section 100 TMA provides for determination of penalties by an officer of the board in an amount that is considered just and appropriate.
25.	Section 100B TMA provides for appeals against penalty determinations.
26.	Section 100 (2)(a) TMA states that the First Tier Tribunal has the authority to set aside, confirm, increase or reduce the penalty charge.
Appellant’s Submissions
27.	The Appellant submitted that the payment was an ex gratia sum made in respect of the breach of his contract by the company who had failed to pay the relevant sum into his pension. He asserted that the breach had caused the termination of his contract and he could have left the company immediately. He had not done so however as he felt that he owed a duty to his colleagues.
28.	The Appellant referred to his letter to HMRC of 2 February 2010 which stated that as it was now accepted by HMRC that the payment was pension related they should have concluded that his knowledge of an exemption for such payment had led him to conclude that the payment was not taxable. He had suffered from a life-threatening illness and as a result had severe financial difficulties.
29.	He told the Tribunal that he dreaded the arrival of the bailiffs to collect a debt which he did not believe that he owed.
30.	The Appellant stated that he had had no option but to take professional advice using money he could little afford. He had consulted accountants and latterly Taxwise. He produced papers received from Taxwise to the Tribunal stating that in their view the payment was for damages because his employment contract was breached, that is he was not given proper notice, and there was no option for the payment to be made into the pension scheme.
31.	He had been referred to the case of Brander & Others v HMRC Sp C [2007] SSCD 582 (Sp C 610) in which a company dissatisfied with the performance of three of its directors invited them to resign. Following negotiations the directors received termination payments part of which were expressed as pension payments. In their tax returns the directors treated these payments as non taxable. HMRC issued amendments charging tax on the payments but on appeal to the Special Commissioners it was held that the pension contributions fell within Section 403 of ITEPA.
32.	He cited other cases including the case of Hunter v Dewhurst HL 1932 16 TC 605 in which the House of Lords found that a payment of £12,900 paid to the chairman of a company in lieu of his waiving his right to compensation on his retirement was not taxable. Lord Atkin held that a “sum of money paid to obtain a release from a contingent liability under a contract of employment cannot be said to be received under the contract, is not remuneration for services rendered or to be rendered and is not received from the contract of employment”.
33.	He submitted, on the advice of Taxwise, that in order to be taxable under the general provisions of ITEPA the payment must be employment earnings in consideration of past or future services.
HMRC’s Submissions
34.	HMRC submitted that as a result of the payment being made direct to the Appellant and not directly into a pension scheme it became taxable and subject to National Insurance.
35.	HMRC submitted that the payment could not be a termination payment as the Appellant had continued to work for the company for the rest of the relevant tax year which was evidenced by a payslip.
36.	Accordingly Ms Leithes-Wilson on behalf of HMRC sought dismissal of the appeal against the amended return and confirmation that the Appellant’s income from employment for the year ended 5 April 2004 was £93,127 and the tax due was £24,298.
Findings
37.	The Tribunal could not reconcile the amounts quoted in Ms Leithes-Wilson’s final submission that tax was due of £24,298. The company had deducted £29,822 of tax and the Appellant received a repayment of £5,103.73. This would mean that tax of £24,298 had already been paid by the Appellant. The Tribunal decided that the balance owed by the Appellant was £4,781.60 as according to the enquiry officer.
38.	The Tribunal found that the Appellant had not been negligent in completing his tax return. He had submitted the return in good faith in accordance with his understanding of the law and the professional advice he had subsequently received had supported that advice. The enquiry officer appeared to have reached his decision on the negligence as a result of incorrect information received that the payment was in respect of a bonus.
39.	The Tribunal found that the delay in answering the HMRC queries was caused by the Appellant’s serious illness and his difficulty in obtaining information from a company in liquidation.
40.	The Tribunal found that the payment could not be a termination payment as the Appellant had continued to work for the company after receipt of the payment and so disregarded the cases produced to the Tribunal in respect of such termination payments.
41.	The Tribunal carefully considered the cases of Hunter v Dewhurst and Wales v Tilley which applied Hunter v Dewhurst but found that Hunter v Dewhurst had been distinguished many times over the years and stated to apply only to its particular circumstances. Whilst the sum of money was paid to the Appellant to obtain a release from a liability under his employment contract the liability was not contingent and it was ultimately received under his employment contract. If the Appellant had put the payment into his pension scheme then it would have been free of tax but he did not do so.
Decision
42.	The penalty is hereby set aside under Section 100 B (2)(a)of TMA.
43.	It is confirmed that tax and National Insurance are due from the Appellant in respect of the lump sum payment. 
44.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

TRIBUNAL JUDGE
RELEASE DATE: 25 MARCH 2011